Having a background in sociology, philosophy, and economics, I'm going to try to give this blog a pretty broad scope. Going from finance and economics, to geopolitics and world news, to the occasional academic or theoretical post.
I was born in Buenos Aires, Argentina and live in New York, so we'll try to add that into it as well.
Even though I like Adam Smith, don't be surprised if a little Marx makes its way in there as well.
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While market attention in the U.S. has drifted away from the Eurozone after the relatively positive result of Sunday’s Greek elections and Fed Chairman Ben Bernanke’s decision to extend Operation Twist, the situation in Spain is as dire as ever. Madrid sold €2.2 billion ($2.8 billion) in short-term bonds at record high rates, making it increasingly difficult for Spain to finance its debt, while an independent audit of its banks released Thursday revealed a €62 billion ($78 billion) capital shortfall.

European institutions have pledged support for Spain, offering up to €100 billion ($126 billion) to bail-out its banks, but with the ECB still unwilling to step in, public support for the euro project has begun to wane, while capital flight has intensified, according to Nomura. The EU remains stuck at these same crossroads for the past couple of years, and is slowly running out of time to keep kicking the can down the road.

Market dynamics in Spanish bond markets have been very particular. On Thursday, Spain’s Treasury held an auction where it sold 2-year bonds at a yield of 4.706%, more than doubling the rates seen in a similar auction in March; bonds maturing in July 2015 yielded 5.457% (compared to 4.876% in May), while 5-years bonds yielded 6.072% (compared with 4.96% in May).

At the same time, benchmark 10-year bonds saw their market-determined yields drop from records well above 7% a few days ago to 6.609% on Thursday. In part, the falling yields could be a reaction to a receding risk of a Euro break-up scenario, as Greece’s new leadership, under New Democracy’s Antonis Samaras, takes power in the beleaguered Hellenic Republic.

With Greece slowly moving to the background, Spain is taking an even more prominent role in the European sovereign debt crisis that has been ravishing the Old Continent for years now. While smaller economies like Portugal, Ireland, and Greece have been forced out of the bond market and subsequently been bailed out, the size of the Spanish economy (the fifth biggest in the Eurozone) gives it systemic importance, it also makes it that much more difficult to deal with it.

Spain is currently facing a banking crisis after a real estate bubble saddled its financial institutions with toxic assets. Not too long ago, the administration led by Mariano Rajoy had to bail-out troubled regional bank Bankia, which put the focus, and the pressure, on its financial sector.

On Thursday, the Spanish government released the results of two independent audits of its financial sector. Conducted by consulting firms Oliver Wyman and Ronald Berger, the audit looked into the books of 14 institutions comprising 90% of the assets that make up Spain’s banking system.

The Oliver Wyman report suggests Spanish banks would need an additional €62 billion to face a stress scenario, in which the economy would be in recession for the next three years and home prices would fall an additional 26.4%. According to Ronald Berger, Spanish banks would need an additional €51.8 billion

The government of Mariano Rajoy is set to go to the European authorities to see how much of the €100 billion initially offered to recapitalize its banks it will request. A second set of independent reports, being taken care of by Deloitte, PwC, Ernst & Yong, and KPMG, will delve into the actual capital short falls of each individual institution.

On Friday, Rajoy will meet his Italian, French, and German counterparts in Rome, where it’s expected that Angela Merkel will be pushed on the matter of on official sector purchases of distressed debt, particularly Spanish and Italian. At the same time, Spanish press believes Rajoy will look to extend the repayment period of these emergency bailout loans, while looking to eliminate any subordination clause that would put European creditors at an advantage to Spanish ones.

Troubles in Europe have extended well beyond their immediate sovereign and private sectors. The global economy is slowing, in part due to contagion fears around the world, according to a strategist at Wells Fargo. FedEx, for example, recently noted their international business would be weaker going forward, given a cooling global economy, while analysts have blamed weakness in Europe for Starbucks’ slowing sales. Procter & Gamble showed slow-to-no growth in developed markets, thus cutting its guidance.

The problems in Europe are far from over, but markets appear to be taking a breather from what had been a hectic couple of months. The Greek elections have given some clarity, and temporarily managed to reduce market expectations of an impending Greek exit, which stoked fears of contagion. Still, Italy, and particularly Spain, are in trouble. As the ECB appears unwilling to step in, public support for the euro project has been waning, according to Nomura. Capital flight is increasing, as unusual buying of foreign fixed income by Eurozone investors has been detected, the analysts explained. Europe has been buying time for a while, the moment to actually use that time is coming.

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